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Corporate Valuation > Relative Valuation > Flashcards

Relative Valuation Flashcards

1
Q

Premiums are calculated using the target’s ____.

During boom times, multiples tend to be ____.

During boom times, premiums tend to be _____.

A

Unaffected stock price

Higher

Lower

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2
Q

In EV calculation, do you use market value or book value of debt?

How do you estimate market value of debt?

A

Ideally, use market value of debt, if you’re able to derive that.

If the company is operationally and financially healthy, market value and book value should be similar.

Look for the latest round of debt issuance and get that interest rate and then calculate from there. See the below.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/mktvalofdebt.htm

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3
Q

Offer value allows the acquirer to gain ____ of the company, but transaction value reflects the _____ of acquiring the company.

A

Offer value = gaining ownership

Transaction value = true cost of an acquisition

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4
Q

In 2005, Wrigely announced its acquisition of the confectionary assets of Kraft Foods with a transaction value of $1.18 billion. The confectionary assets of Kraft had LTM EBITDA of $107 million. Expected annual cost savings were $30 million.

  1. Calculate LTM EBITDA multiple ex synergies
  2. Calculate LTM EBITDA including synergies
A
  1. 11x pre synergies
  2. 8.6x post synergies
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5
Q

Pg 57 relative valuation

A
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6
Q

What is straight debt?

A

Debt that is not convertible

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7
Q

What is the purpose of multiples?

Equity multiples apply to which investors in a company?

EV multiples apply to which investors in a company?

A

To compare companies on the same platform to show relative value. Essentially, it is an apples to apples comparison.

Equity ratios apply to equity shareholders.

EV multiples apply to both debt and equity holders since EV is unlevered, thus is the value of debt and equity holders.

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8
Q

What is the difference between appraisal value and M&A value?

A

Appraisal value values the intrinsic worth of company and/or does so against its peerset (public comparables analysis and DCF analysis)

M&A valuation takes into account premiums paid above appraisal (standalone value) to reflect the purchase price in an acquisition

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9
Q

In 2006, KKR, Silver Lake, and Co. acquired a 80.1% stake in Philips Semiconductors for euro 3.4 billion. The LBO consortium assumed euro 4 billiion in debt.

What is the implied offer value and implied transaction value?

A

Implied offer value = 4.245

Implied transaction value = 8.24

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10
Q

What attributes do professionals examine to determine a peer set for a company? Explain the attributes.

A

C.O.M.P

Credit, operational, market factors, performance (financial)

Operational

Industry, products/services, distribution channels, customers/consumers, technology, geographic region

Financial

Most important: size (annual revenue, equity value, EV)

Credit Risk and Financial performance

Credit risk

Leverage/coverage ratios and credit ratings

Financial Performance

Operating margins, growth

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11
Q

What is the metric for a company’s operating profit?

What is used as a proxy for FCF or operating cash flow?

A

EBIT

EBITDA. Remember, just a PROXY since it excludes D/A, interest expense and taxes, all of which are considered in operating cash flow.

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12
Q

Pg 125 Relative valuation

A
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13
Q

What is the gross up method used for?

How do you gross up offer value?

Do you gross up debt value?

A

To correct the inconsistency of multiples in a less than 100% acquisition of a firm

Simply divide the offer value by the % stake

No

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14
Q

Pg 51 Relative Valuation

A
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15
Q

What is carrying value?

Is preferred stock sometimes covertible into common stock?

A

Its value on the balance sheet.

Yes.

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16
Q

Pg 171 relative valuation

A
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17
Q

Describe the idea of numerator/denominator consistency.

A

The numerator is typically equity value or EV, which must be match according the the earnings profile of the capital holder. Equity value should be matched with income after interest expense has been paid. EV needs to be matched with income that hasn’t been paid to debtholders. It needs to include income to both debt and equity holders.

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18
Q

What type of analysis shows the various ranges for offer prices/share?

A

The football field

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19
Q

What do you do to the income statement to show a more accurate reflection of operations?

A

Adjust for non-recurring items

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20
Q

Pg. 203 relative valuation

A
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21
Q

Pg 165 relative valuation

A
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22
Q

Explain, generally, dual share characteristics.

A

Typically, there is Common Stock A and Common Stock B shares. Differentiating features include voting privileges, conversion factors, dividends, private vs public, etc

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23
Q

How is mergers consequences anaylsis similar and different from LBO analysis?

A

Different

Merger consequences looks at accretion/dilution impacts to EPS and is typically the result of a strategic merger. Whereas LBO analysis is a financial acquisition in which the sponsor is looking to exit in 5-10 years.

Similar

Both look at impacts to the balance sheet and subsequent leverage and coverage ratios

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24
Q

When choosing a precedent transaction to analyze, do you match the company you are analyzing to the precedent transaction’s acquirer or acquiree?

What are those characteristics?

A

Acquiree (company being acquired).

Operational

Industry, products, distribution channels, customers/consumers, patents, geography

Financial

Credit risk/Financial performance

Other

SIZE!

Hostile vs friendly

Strategic vs financial

Economic/market conditions

Potential for synergies

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25
Q

Mandalas corporation acquired a 72% stake in Holistic Living business for $432 million. Tea Garden retained 28% of its stake in the business. Mandalas corporation also assumed $125 million in debt in this transaction. Holistic Living business had $117 million in LTM EBITDA and $53 million in LTM net income.

  1. Calculate implied offer value
  2. Calculate implied transaction value
  3. Calculate multiple of LTM EBITDA
  4. Calculate multiple of LTM NI
A
  1. 600 million
  2. 725 million
  3. 6.2x
  4. 11.3x
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26
Q

What is one of the biggest factors aside from C.O.M.P. analysis to include in selecting prior deals for precendent transactions anaylsis?

A

Potential for synergies

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27
Q

What is a mixed consideration transaction?

A

A transaction that utilizes both debt and equity to fund an acquisition

28
Q

What is the effect on EBIT, taxes, and NI when you adjust for a loss/charge?

What is the effect on EBIT, taxes, and NI when you adjust for a gain/income?

A

EBIT increases, taxes increase, NI increases

EBIT decreases, taxes decrease, NI decreases

29
Q

Who are the 4 main capital funders in a company?

Equity value is derived by using basic shares outstanding or diluted shares outstanding?

Does equity value use outstanding options or exercisable options?

Does equity value use in-the-money options are all options?

Other than strike price in relation to current price, what determiens if an option can be exercised?

In short, you use _____ and ____ options to derive total diluted shares.

A

Equity holders, debt holders, preferred stockholders, and minority interest holders

Diluted shares outstanding

Outstanding

Only in-the-money

There are time constraints on when an option can be exercised. Thus, the option could be in the money but if it is restricted by time, then it can’t be exercised.

Use outstanding and in-the-money options to derive fully diluted shares

30
Q

What are the three ratios to determine credit risk?

A

Leverage ratio

Coverage ratio

Debt/Total Capitalization

31
Q

Describe non controlling interest.

Do you adjust non-controlling interest to fair value when calculating EV?

A

A parent company owns a subsidiary that has a 20% ownership by other investors. That 20% is labeled on the balance sheet as the non-controlling interest. The other 80% is already consolidated into the parent’s balance sheet.

Yes, adjust it to market value!

32
Q

Why are diluted shares included in offer value, etc?

A

Because diluted shares includes basic shares plus in other shares that could arise from options and convertible securities.

33
Q

What is total capitalization?

A

The summation of all debt and shareholders equity

34
Q

What is the formula for transaction value?

A

Offer value of equity + total debt + value of preferred stock + minority interest - cash/cash equivalents

35
Q

Once you have the TV/EBITDA multiples from previous transactions, what do you then do to derive implied offer price/share?

A
  1. Take the multiples and multiply it by the target’s EBITDA to get the transaction value
  2. Subtract net debt, value of preferred stock, minority interest and add equity interest to get offer value
  3. Divide by diluted shares outstanding to derive implied offer price
36
Q

What are common examples of non-recurring items?

A

Legal settlements, restructuring charges, asset impairment charges, gains/losses on the sale of a division, one-time tax benefits

37
Q

What are 3 challenges in selecting a peer set?

A
  1. Potentially having to separate a division within a company
  2. Extreme size differentials
  3. Public vs private companies
38
Q

What are the two most common forms of currency to acquire a target?

A

Debt (cash) and the acquirer’s shares

39
Q

What is the underlying shares increase formula (convertible bond)?

What is the adjusted NI formula to account for the interest expense as a result of a convertible bond?

Example:

A company has a 4% coupon, $100 million convertible bond, a 35% tax rate, and $500 million of reported NI. Show the adjusted NI.

A

Principal amount of convertible bond / conversion price

Ex: Adjusted NI

$502.6 million

40
Q

For EV calculation purposes, what should be classified as debt?

Are capital leases classified as debt?

Which of the following would be considered debt for EV calculation purposes:

Notes payable, Accounts payable, accrued expenses, current portion of long term debt, balance of long term note, capitalized leases, other current liabilities, revolving credit facility

A

All interest bearing liabilities.

Yes! Capital leases are classified as debt

Interest bearing debt

notes payable, current portion of long term debt, balance of long term note, capitalized leases, revolving credit facility

41
Q

What is enterprise value?

A

The value of a firms debt and equity holdings. Essentially, the value of the entire firm (including both debt and equity).

Market value of equity + net debt + preferred stock + minority interest

Or

Market value of equity + Value of debt + value of preferred stock + minority interest - Cash/Cash equivalents

42
Q

What information do you need to perform convertible bond analysis?

What debt value do you use to convert the amount to shares?

A

Coupon, principal, conversion price, maturity date, conversion ratio

Use the original book value of the bond

43
Q

What is the biggest difference between restricted shares and stock options?

A

Restricted shares issued do not come with any offsetting cash from the person awarded the share, whereas stock options come with cash from the person receiving the option.

Restricted shares = no cash to company

Options = cash to company and used to buy back shares

44
Q

In valuing equity interest, do you use carrying value (book value) or market value?

If the market valuation is not available in the footnotes or easily derived because of indicating % ownership, then how do you derive market value?

A

Market value

Two methods

  1. Derive a comparable P/E ratio and multiple that by the earnings on the investee found on the income statement
  2. Derive a comparable market value / book value ratio, and multiply it by the carrying value (book value) on the balance sheet
45
Q

Which option would dilute shares the least?

A company’s stock is 15/share

Choice A:

The company issues 100 options with a strike price of $10/share

Choice B:

The company issues 30 restricted shares

A

Choice B dilutes shares the least

46
Q

What is the Blended Offer Value (per share) formula?

A

Value of cash portion (per share) + Value of shares received portion (per share)

OR

Value of cash portion (per share) + (acquirer’s share price x exchange ratio)

47
Q

What are the 2 categories of restricted stock awards?

A

Restricted stock and restricted stock units (RSUs)

48
Q

What are more practical ways to gather a peer set?

A

Utilize previous analyses

Utilize public filiings that may indicate competitors to a company

Capital IQ, Bloomberg, etc

49
Q

What are the three main types of synergies?

What is the adjusted EBITDA multiple formula as a result of synergies?

A

Cost reduction, revenue enhancement, and CapEx savings

Transaction Value / Target’s EBITDA + Annual expected synergies

50
Q

What are the first 2 steps in precedent transactions analysis?

A
  1. Identify a deal list
  2. Gather relevant financial information
51
Q

In precedent transactions analysis, you pull documents for which company (acquirer or acquiree) and for which timeframe?

Which documents should you pull?

A

Pull documents for the acquiree for (typically) the LTM as of the transaction announcement date.

10-K, annual report, 10-Q, S-4, 8-K

52
Q

Review Appendix starting on pg. 174. They are advanced topics that I did not study as of June 10th 2018

A
53
Q

In public comparables equity value, options are in the money when ____?

In acquisition comparables offer value, options are in the money when ____?

A

Public comparables = current price per share is greater than the exercise price

Acquisition comparables = offer price per share is greater than the exercise price

54
Q

What is excluded from EBITDA that is adjusted for in CFO?

What is excluded from EBITDA but adjusted for throughout the entire cash flow statement?

A

Interest, taxes, dividends received, working capital

CFO adjustments, CapEx, gains/losses on investments, debt issuance/repayment, cash from stock, treasury stock, dividens paid

55
Q

What is Total Potential Shares?

A

Basic shares + Potential shares from outstanding in-the-money options + Potential shares from in-the-money convertible securities

56
Q

What is the exchange ratio?

A

The number of shares each of the target’s shareholders will receive per 1 share of the acquirer’s shares.

= Offer price per share / acquirer’s price per share x % stock consideration

57
Q

When normalizing past EBIT, what is important to consider?

A

The impact on taxes.

58
Q

Pg 114/115 Relative valuation

A
59
Q

Why would a finance professional use both historical and forward multiples?

For both forward and historical multiples, the numerator is ____ while the denomintor is ___ or ____?

Equity investors typically look at ____ projections, whereas debt providers look at ____ results.

A

Historical multiples help to validate whether forward multiples are realistic/sustainable

Numerator = current statistic

Denominator = historical or forward looking statistic

Equity investors = forward looking

Debt investors = historical results

60
Q

Why do professionals adjust for non-recurring items while conducting comparables analysis?

A

You want to analyze only the companies core operations. Also, it could significantly alter the multiples if non-recurring items are not adjusted.

61
Q

In regards to a convertible bond, what is the conversion price?

When is a convertible bond in-the-money?

What are the key adjustments once a bond becomes in-the-money?

For valuation purposes, what is assumed about convertible bonds?

A

Predetermined level that a company’s share price must reach in order to convert the principal of a bond into equity

In-the-money convertible bond = company share price is equal to or greater than the conversion price

Key adjustments:

  • removal of bond from balance sheet
  • increase in equity issuance
  • removal of after-tax interest expense related to the bond

Assumptions:

Assume that all convertible bond investors would convert to equity upon maturity

62
Q

In addition to options, what are other considerations in deriving fully diluted shares?

A

Convertible bonds, restricted stock, restricted stock units, dual shares, ADRs

63
Q

Do you make any adjustments to EV if the convertible bond is out-of-the money?

A

No, treat it as straight debt. Adjustments won’t be made until the convertible bond becomes in-the-money.

64
Q

What does EBITDA not capture that is extremely important?

A

CapEx, depreciation, taxes

65
Q

When calculating historic multiples, which timeframe is typically used? How do you derive this timeframe?

Why use LTM for historical performance?

A

LTM

Take the latest FYE (fiscal year end), add the most recent period, and then subtract that same period that occured 1 year earlier.

LTM captures most recent data, compares companies on the same timeframe, and it takes into account the seasonality effect

Corporate Valuation (7 decks)

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